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Dividend cut "increasingly likely" at Tesco, says Brewin Dolphin

A dividend cut is looking "increasingly likely" at Tesco, according to broker Brewin Dolphin which downgraded its recommendation for the supermarket stock on Friday.

Nicla di Palma, equity analyst, said that incoming chief executive Dave Lewis is "very well regarded" and familiar with the fast-moving consumer goods industry, having spent his working life at Unilever. However, she pointed out that "he does not have any previous direct retail experience".

"The question on investors' minds (which unfortunately will not be answered for at least six months as he only takes over officially in October) is what strategy Mr Lewis is going to implement at Tesco in order to stop the market share loss and turn around the underperforming large stores," the analyst said.

Di Palma believes the most likely option for Lewis is that it would impose further "significant" price cuts in order to close the gap with Asda, as well as investment in product availability and store experience. These moves will "not bode well" for operating margins in the UK, she said.

"We also believe that the probability of a dividend cut has increased significantly (it was 14.76p in 2013/14): a cut to 10p would save the company £400m and give additional firepower for the much needed store investments."

While a fresh perspective might help the long-term future of Tesco, Brewin expects there will be "short-term pain".

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